Publishing Royalties 101

What Are Publishing Royalties?

Royalties are a common payment framework for many different kinds of business agreements, and are especially prevalent in book publishing deals. 

Generally speaking, royalties are a share of revenue paid to an intellectual property creator or property owner by a licensee. The licensee (a publisher, manufacturer, or other) acquires certain rights to use the property to generate profit in exchange for royalty payments. 

This model frees the property creator or owner, perhaps an author or artist, to focus on their creative work, while the licensee takes on the responsibilities of marketing, sales, and distribution. The licensee may also have permission to repackage or reformat the work, or sublicense it to be used in other products for sale by other businesses. The creator and the licensee share in the risks and the profits of production and sales.

The publishing royalties model contrasts with two other approaches: self-publishing, in which the creator also acts as the distributor, and is therefore not required to share the profits from the sale of their work; and work for hire, in which the publisher pays a single flat fee for full ownership and unlimited rights to use the work.

This article focuses specifically on understanding publishing royalties: the different types, how they are calculated, and tips for using royalty automation software to simplify the processes of royalty calculation and payment.

How do publishing royalties work?

Foundationally, publishing royalties are a percentage of sales paid by the publisher to the licensor or creator of a given work. This sounds fairly simple, but the intricacies of modern business quickly complicate the publishing royalty calculation process.

First, there may be multiple co-authors, co-writers, or co-creators who share the royalties at various levels. There may be advances to consider: the publisher may pay an upfront fee to the creator(s), which is recouped against future royalty payments. Different royalty rates are likely to be assigned to different formats and uses of the published work. Royalty agreements can be intensely complex, so it’s important for both creators and publishers to have excellent legal representation and robust royalty management processes in place before entering into a publishing agreement.

What are the types of book publishing royalties?

Broadly speaking, book royalties can be broken down into “traditional publishing” royalties, or profit sharing agreements.

Traditional Publishing Royalty Agreements

Until recently, “traditional royalties” dominated.  In this situation, publishers take most of the financial risk in publishing the book, including editing, typesetting, creating artwork, and ultimately printing.  Authors and book publishers will consider many different options when developing a traditional royalty agreement.

There are a couple different approaches to this type of book publishing royalty calculation. Retail royalties or list royalties are calculated based on a percentage of the list price or sale price of the book. Net royalties consider the discounts that publishers are often required to give to retailers, and are based on the publisher’s net revenue from the sale of the book.

Book publishing agreements are also likely to include different royalty rates for different formats or distribution methods, including hardcover, paperback, e-book, and audiobook.

Contracts may also include royalty terms for subsidiary rights: translations, reprints in other parts of the world, adaptations for other media, and/or merchandising.

Other variables may include bonuses and/or royalty rate escalations or decreases based on various benchmarks.

Profit Sharing Royalty Agreements

Over the last couple of decades, many publishers have begun sharing the financial risk of publishing more with the authors.  In this model, sometimes called hybrid publishing, publishers provide many of the same services as traditional publishers, but deduct the costs of creating the book before paying out royalties.  The benefits of this model are that it allows more authors to be published, as it reduces the risk to publishers.  It also allows authors to have a bigger upside if their book is successful.

Royalty rates in profit share royalty agreements are typically much higher.  They also tend to be simpler.  In traditional agreements, since print books are more expensive to produce than ebooks, they tend to have lower royalty rates. In profit sharing models, there is a single royalty rate across formats, but since the costs of production and distribution are subtracted before royalty payments are calculated, the author’s share of the profits is still affected by the varying rates of production expenses.

The profit sharing model is more common among smaller, independent publishing houses, rather than large, established ones. In this model, it’s less common for an advance to be paid.

Who collects publishing royalties?                                                                                                                                                 

In book publishing, authors and sometimes illustrators collect royalties. They may share a percentage of their royalties with their agents.

How are publishing royalties calculated?

In the book publishing business, the publisher collects sales reports from all their sales outlets, then processes the royalty calculations based upon all the rules and variables outlined above. The publisher then generates reports and royalty statements, and pays out the associated royalties due to the author or other royalty recipient.

How can publishing royalty calculations and payments be simplified?

Publishing royalties are determined by a vast array of variables, and historically, royalty managers have spent untold hours performing tedious manual calculations, first in ledgers, then in spreadsheets. Not only is this a time-consuming process, but it is also error-prone and lacking in transparency, making audits painful and unreliable.

Fortunately, purpose-built royalty automation systems have been developed to speed up and streamline that excruciating process. Hundreds of book publishers have turned to the book publishing royalty software from MetaComet® Systems. The MetaComet suite of royalty management tools has been tailor made for book publishers, and allows instant sales report ingestion, royalty calculation, and distribution of royalty reports, statements, and payment files, even for publishers with thousands of contracts in play.

If you’d like to learn more about how MetaComet® software can cut your book publishing royalty management time by 90%, increase accuracy, improve your author relationships, and decrease your royalty team’s stress levels, please contact us for a discovery call, and we’ll be happy to work with you to determine whether royalty automation is the right solution for your business.